Tough times for litigation vehicles in Germany?
Locations
After the "wenigermiete" judgment of the Federal Court of Justice (BGH) of November 2019 (judgment of 27th November 2019, case no.VIII ZR 285/18), the path appeared to be clear for the enforcement of claims in court by collection agencies (used as litigation vehicles). Were it not for the small addition by the German Federal Court, stating that the "wenigermiete" model is "still" (which in the German original may be read as "only just") a collection service. This wording is now utilized by some courts to consider what "no longer" counts. Recently, several litigation vehicles have been affected by this.
In the field of antitrust damages, claims have been enforced in bundles for some time by collection agencies. However, the Regional Court Hannover (LG Hannover) has now, with a decision of May 2020 (judgment of 4th May 2020, case no. 18 O 50/16), exacerbated in the sugar-cartel what the Regional Court Munich (LG Munich) had previously started in the truck-cartel (judgment of 7 February 2020, file no. 37 O 18934/17). These courts opposed the bundling of claims by collection agencies. The floor is starting to shake for these assignment models because they are "not typical for debt collection".
This jurisprudence is wrong because it establishes a "phenotypical model" of collection activity which the German Federal Court of Justice and the Federal Constitutional Court wanted to overcome. It does not contribute to the efficiency of proceedings, but rather it destroys assignment models in which similar claims are bundled. At first glance, all that remains is the bundling of claims as joint-litigants, a final purchase of claims (in which case the RDG (German Act on the provision of legal services) is not applicable) or the assignment of claims to a law firm. These decisions are however by no means directed only against novel legal tech firms. Even corporations or pure process financing vehicles that want to bundle claims and enforce them efficiently are now starting to feel the pressure.
What was the subject matter of the cases?
In Munich, the legal tech provider Financialright bundled claims for damages against manufacturers within the truck cartel for more than 3,000 aggrieved purchasers. This was done by means of debt collection assignments to a company operating under a debt collection license. In its decision of February 2020, the Regional Court denied Financialright's right to bring the claim. The assignments to the debt collection company were deemed to be null and void because the model was "from the outset exclusively aimed at enforcement of the claims in court" (LG Munich, para. 121). In addition, the Regional Court saw conflicts of interest (§ 4 RDG) which allegedly resulted from the involvement of a litigation financier.Even in a case where litigation financing was absent, the LG Hannover came to the same conclusion. In that case, more than 60 Kaufland (a German supermarket chain) sales companies had assigned their claims for damages (due to cartelised sugar prices) to another company in the group for collection, but without being affiliated companies within the meaning of the RDG exemption clause (§§ 2 para. 3 no. 6 RDG, 15 AktG). Here, too, the action was dismissed because the activity was "at least essentially aimed at enforcement in court" (LG Hannover, para. 157). The LG Hannover did not raise the problem of bundling the claims itself. There were efforts by the parties to reach out-of-court settlements in both cases, but the extent of these efforts was disputed, particularly in the proceedings before the LG Munich. They certainly did not lead to success in either case.
So where nothing can be achieved out of court, a process vehicle must not be used?
On the contrary, the legislator allows collection agencies to "provide ongoing advice to a party to the proceedings" (Bundestag archive 16/3655, p. 45), and the Federal Court has allowed them "to provide comprehensive and fully-fledged advice to those seeking legal assistance", even during an ongoing trial (Federal Court, wenigermiete judgment, para 97 and 118). They are therefore not limited to "simple dunning and recovery activities". As far as the enforcement of claims is concerned, since at least the wenigermiete ruling, there are no longer any restrictions as to which claims may be enforced in court by collection agencies. If the debtor raises objections, this does not hinder the collection service provider either (Federal Court, para. 129). Representation in court must of course be provided by lawyers, but this has never been in dispute. In this respect the Court states that the legal advice of the collection service provider and that of the lawyer "complement each other" (Federal Court, para. 126).The Federal Court justified this broad understanding of debt collection with the express wish of the legislator for a "liberalisation" and "opening of legal services law for future development" (refer to the the Federal Court's judgement at para 141). The Court also links the often strained word "still" with a broad interpretation: The operator of wenigermiete.de is "(still) within the scope of the authority to provide collection services (...), because the collection service includes legal advice to the creditor regarding the collection of the claim." (Federal Court, para. 111). The reference was obviously intended to make it clear that other legal activities outside the enforcement of claims - for example the defence against claims or general legal advice - no longer constitute a collection service.
In addition, the "primary focus on judicial enforcement" (LG Hannover, para 163) is not a suitable criterion for delimiting the right to bring an action. The courts in Hannover and Munich carried out an ex-post examination of the course of the conflict. According to this model of thought, the opponent of the claim can determine how claims against him can be made through his willingness to reach agreement. They solely have to categorically exclude negotiations in order to deprive a process vehicle of its legitimacy to bring an action. This makes no sense. Conversely, the debt collection service provider would be obliged to take economically nonsensical recovery measures, even if they do not lead anywhere in the individual case. This view mirrors that of the Regional Court of Braunschweig, which on 4th February had to decide on the bundling of claims for damages by Financialright in the Diesel scandal (judgement of 30th April 2020, case no. 11 O 3092/19, para. 71). Furthermore, what does "primary focus" actually mean? Where does it start?
One can sense the judges' frustration with the huge volume of proceedings in the "assignment model". In Munich, the enraged thesis was put forward that Financialright was inefficient and that there was therefore even a conflict of interest with regard to the enforcement of the claims. "Even if one assumes a (small) efficiency advantage, this is in any case not only consumed by the effort and expense involved in bundling in the cession model (...), but rather turned into its opposite" (LG Munich, para. 142).
What is at issue here is, in truth, the unease of some courts with assignment models and success fees - in other words, exactly what the Federal Court allowed in November 2019. These models are also displeasing to some other actors. The BRAK (Federal association of attorneys) has already proposed in 2019 to deny collection service providers the offer of success fees in the future, fees, which have brought far-reaching improvements in access to law through Legal Tech in the past. The Federal Council also took on the idea in June 2020 as part of the reform of the collection law (BR-Drcks. 196/20), perhaps without realising that the Federal Court wanted to give the collection service provider the opportunity to create financial incentives for its commission (Federal Court of Justice margin no. 186; judgement of 08.04.2020, Ref. VIII ZR 130/19, margin no. 74).
The decisions of the regional courts create uncertainties regarding access to justice until the higher courts find a clear line on the issue of claim bundling. The current procedural alternatives all have pitfalls for aggrieved parties. Litigating in cohorts not only leads to immense economic and organisational effort, but there is also always the threat of the proceedings being separated. Only a few people are likely to want to bear the financial risks of the genuine debt purchase; this option is most likely to be considered for aggrieved corporate groups. What remains is to swap the process vehicle for a law firm. However, until the remuneration law and the prohibition of participation are liberalised, this variant is only of interest to a few.
Philipp Plog is Managing Partner of Fieldfisher in Germany. He represents a number of Legal Techs and is the spokesman of the board of the Legal Tech Association in Germany.
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This text was published on lto.de on 29th of June 2020.